Interactive Investor

Northbridge plunges after second warning

28th May 2015 11:23

Harriet Mann from interactive investor

This year is going to be worse than initially thought for Northbridge Industrial Services. Management had already warned at April's annual results that half-year numbers would be less than last year. Now, they say the company will be loss-making in the six months to 30 June, and while the firm should make money for the full-year, expectations have been downgraded. It's why one expert thinks the shares are worth a whole lot less.

Northbridge's Crestchic Loadbank operations in Singapore and Dubai are hurting most, along with its Australian Tasman Oil Tools business. These are largely rental businesses that are suffering from shrinking oil industry capex budgets. As contracts come to an end, new ones will be harder to win, and management expect demand will take time to stabilise. The transformer rental operations and its Crestchic in the UK and Europe are doing better, however, and are generating strong cash flow.

Still, management believes it is "prudent" to expect difficulty into 2016-2017, so is speeding up the de-gearing of its balance sheet to make sure it is ready to take advantage of the upturn when it arrives. They are looking at reducing capital expenditure by another £10 million over the next 18 months, improving cost savings and selling non-core assets to raise £1.5 million by the end of June.

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Northbridge has already sold its generator rental activities in the Middle East, its air compressor rental business in the UK and closed its business in Vietnam. Its non-core hire fleet has been offloaded and cut its hire fleet capex. Its workforce has also been cut by 10%.

This will leave firm focused on its two core businesses: Crestchic, the manufacture, sale and rental of Loadbanks and transformers, and Tasman Oil Tools, the rental and management of oil & gas drilling equipment. Tasman, bought last year, is most impacted by the oil slump.

But all this remedial action cuts no ice with WH Ireland analyst Nick Spoliar. He's slashed his target price for Northbridge from 300p to 175p, which is 40% lower than current levels: "We anticipate on this basis that the business will make only a small profit in the full year 2015E. Our Hold recommendation becomes a Sell. We will revisit the target price in light of further detail from the company."

Pencilling in first-half losses of £1 million, Northbridge's broker Westhouse Securities has downgraded its sales forecasts from £49.3 million to £45 million, pre-tax profit from £7.5 million to £250,000 and EPS from 32p to 1.1p. Given downgrades to 2016 and 2017 too, dividends are not expected for this year or next.

Northbridge shares plunge by as much as 30% Thursday to 211p, their lowest since the end of 2012 and down 59% since March this year.

This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.